AUSTRALIA: Takeover Panel issues Guidance Note 12 on Australia takeovers frustrating action

Friday July 18 2014

The Australian Takeovers Panel has issued a revised Guidance Note 12 on Frustrating Action during a takeover bid.

The guidance note has been prepared to assist market participants understand the Panel`s approach to actions that could frustrate a takeover bid or potential bid.

Frustrating Action details an action by a target, whether taken or proposed, by reason of which a bid may be withdrawn or lapse or a potential bid does not proceed.

Guidance note 12 states that this note extends to potential bids, it is mandatory that a potential bidder make it clear to the target what conditions would apply if a bid were made. An action that triggers a condition is a frustrating action, but whether the action gives rise to unacceptable circumstances will depend on its effect on shareholders and the market in light. Examples include:

• An action triggering a condition not commercially critical to the bid is unlikely to give rise to unacceptable circumstances.
• An action that triggers a `condition` in a potential bid may not give rise to unacceptable circumstances if the bidder indicated that it would proceed only if the bid was recommended and the directors have rejected the approach.
• A proposed scheme, requiring target board support, cannot be frustrated if the target board does not support it.

The Takeover Panel will take into account the actions of directors when considering the acquisition of a substantial interest.

In considering whether frustrating action gives rise to unacceptable circumstances, the Panel is guided by the following:

• how long the bid has been open and its likelihood of success

• any clearly stated objectives of the bidder and whether the condition is commercially critical to the bid

• whether it is `unreasonable` for a bidder to rely on the condition before the Panel

• whether there is a competing proposal already

• whether the frustrating action was undertaken by the target in the ordinary course of its business. A bidder must accept that the target`s normal business will continue normally

• whether there is a legal or commercial imperative for the frustrating action

The following are some examples of actions that may give rise to unacceptable circumstances:

• issuing new shares (or convertible securities), or repurchasing shares, if significant in the context of the target`s issued capital or the bid

• acquiring a major asset, including by making a takeover bid, or disposing of one

• undertaking significant liabilities or materially changing the terms of its debt (where the takeover would not have given rise to these changes)

• declaring a special or abnormally large dividend

• significantly changing company share plans or entering into joint ventures.

• Unacceptable circumstances

If a frustrating action creates for shareholders a choice between the proposals, the frustrating action will not generally give rise to unacceptable circumstances.

The Panel generally does not consider it an answer to unacceptable circumstances that, for example, a transaction may be lost because of the time involved in calling a general meeting. Relevant factors include the value of the transaction to the target and why it could not be conditional on shareholder approval. However, the Panel recognises that shareholders may be given a choice in different ways, as suits the particular transaction dynamics.

Remedies

The Panel has wide powers to make orders, including:

• preventing an action or transaction from proceeding

• requiring the target to seek shareholder approval of the action or transaction and unwind an action or transaction.

The Panel may override directors` decisions even if they were made consistently with directors` duties.

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